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Memory chip prices fall

After a brief period of stabilization, memory chip prices begin another steady decline.

After a brief period of stabilization, memory chip prices are beginning another steady decline.

Large memory chip manufacturers are forecasting a drop in demand in the beginning of next year. And, in anticipation, prices in bellwether markets such as Japan are already dropping. In particular, prices for large-volume orders of 16-megabit DRAMs (dynamic RAM chips), which are the staple for desktop PCs, are resuming a downward trend, according to the Nihon Keizai Shimbun, Japan's largest business daily.

"About two months ago, there was a big spike in memory prices. Prices increased about 40 percent over a two-week period, but prices have been dropping since then. DRAM prices are the lowest they've ever been," according to Mike Houghton, manager of memory products for Insight Direct.

Prices for 16-megabit DRAM chips, for example, are falling to levels well below $8 and spot market prices are considerably lower, according to reports.

With the Christmas production spike finished, the drop doesn't really come as a surprise. "To some extent, this is a seasonal change. Chip makers are venting excess inventory as much as possible to close out finances. It's also the end of the holiday season, and OEMs have already started to throttle way back on production of PCs," said Gary MacDonald, vice president of marketing for chip maker Kingston.

Industry observers agree. "There has been a widespread industry expectation that prices would decline again and the market and [would] go back to a resumption of lower demand," said Dean McCarron, a principal at Mercury Research, a Scottsdale, Arizona-based market research firm.

But the downward turn may be more severe than some of the manufacturers anticipated. Several major Japanese chip makers, for example, are postponing plans for new plants, according to Japan-based reports. "Nobody's going to invest in a $1 billion dollar plant if you're not making money," said McCarron.

Hitachi, for example, will delay plans to invest in a plant with LG Semicon of South Korea. The facility was slated to start producing 16-megabit DRAMs and next-generation 64-megabit chips in 1998. But now the companies say they can't nail down a start date for plant construction because of uncertainty in the chip market, according to the Japanese daily.

A Toshiba-Motorola joint venture will also postpone plans for additional manufacturing capacity for DRAMs in Japan.

The extended period of ever-dropping prices has been a challenge for chip makers. "Class-five rapids. For last 12 months, that's what the markets have been like," said MacDonald.

Indeed, because of production cutbacks, the stage is also being set for another tight market in 1997 or 1998. "Less factories will drive the next shortage," said McCarron.